7 Ways to Avoid Credit Stupidity

1 – Don’t close credit card accounts

If you quickly close your open credit card accounts, your credit score will plummet. Though you might not think this is the case, credit scores aren’t built around common sense and nixing unused lines of credit isn’t the best option, though it seems practical. When you close an account, you lose that addition to your total amount of available credit. Lowering the credit available without changing your level of debt skews the ratio of debt-to-available-credit. For those with very low balances, closing newer credit accounts slowly can make sense, particularly if high interest rates or annual fees accompany the cards. Having too much credit, however, will rarely be a problem. It is true, however, that mortgage lenders may assess the amount of credit available to consumers who take out a home loan and take this credit into consideration when evaluating their trustworthiness.

2 – Don’t let credit cards collect dust

Consumers shouldn’t jump to close credit accounts, but letting cards sit idle by keeping them in a shoebox for an emergencies only or burying them in the backyards could potentially backfire. Lately creditors have been in a “use it or lose it” attitude with a heavy emphasis on the “lose it.” If your open accounts are unused for long enough, the company can stop reporting it to the credit bureaus altogether. If the account goes unreported, it won’t be contributing to your available credit, which will affect your credit utilization ratio.

3 – Don’t run up high balances

The only worse alternative to using too little credit is using too much credit. Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling in Silver Spring, MD says the Fico score in particular favors lots of credit that is not utilized too much or too little. 30% of the FICO score concerns the amount borrowers owe and then compares it to the amount of credit they have available. This utilization ratio is negatively skewed when you owe upwards of 30% of your available credit, especially if one card is at or near it’s limit. Contrary to popular belief, it is not only irresponsible or desperate spenders who have hurt their scores because of large balances relative to their limits. This unfortunate circumstance can happen to anyone who carries a balance if a lender decides to cut your credit limit, for instance, in response to market conditions. To prospective lenders who will look at your credit report, it looks like you maxed out your credit cards instead of keeping a previously low balance relative to the limit.

4 – Don’t apply for new credit repeatedly

A lot of consumers think new credit is simply a shiny new credit card in your wallet. New credit is actually, however, a dent to your credit score – at least in the short run. New credit accounts undoubtedly lower the average age of your credit history. If you’ve had one card for 20 years and then five others that you just got because you went to five different stores during the holidays and were offered rebates upon signing up your credit score is going to take the account you’ve had for 20 years (240 months) and the five accounts you’ve had for one year. This means the five accounts times 12 months would be averaged with your previous card, and it would only look like you’ve had credit for four years. Applying for a credit card causes a hard inquiry on your credit report. The alternative, a soft inquiry, happens when you pull your credit report, Inquiries aren’t extremely damaging to your score, but multiple hard inquiries within a short period of time are a red flag to lenders because of the desperation factor or the possibility of illegal activity. Most credit card companies and banks try to steer clear of consumers in these scenarios.

5 – Pay fines and non-credit card bills

Seemingly meaningless hassles, like avoiding overdue book fines at the library and outstanding parking tickets, can negatively impact your credit score. Public institutions and municipalities nowadays are using credit to get people to pay up. If someone has an old library fine that remains unpaid, it could be damaging their credit score without the consumer even knowing. This is exactly why it is essential to repeatedly check your credit score. Other business relationships that don’t normally report good payments might turn around and hurt you if you decide to lag on your payments. Any business, ranging from cell phone companies to garbage collection companies, can turn on you when it comes to collecting what’s owed – which means sending your account to collections.

6 – Don’t ignore mistakes on your credit report

Though credit bureaus are sometimes shady, when it comes to disputing inaccuracies on your credit report, they don’t cause much trouble. Granted they might not fix them right away and it could be next to impossible to get anything but a recording on the phone. Sometimes (and probably more often than not), disputing your report is easy and worthwhile. Before disputing, consumers must obviously check their own credit report. Now this process is easier than ever, so consumers have unlimited access to their own information, which is huge since previous methods of obtaining a credit report (namely in times before the Internet) were time-consuming and tedious. Mistakes on your credit report can nowadays be remedied easily and quickly, unlike other issues that hurt your credit scores, so you should definitely monitor your own credit report.

7 – Don’t skip or make late payments

This is the most obvious of the ways to keep a healthy credit score. Paying late and missing payments can be hugely detrimental to your credit score. Fortunately, however, not all missed and late payments are counted equally in credit score calculation. MyFICO.com’s Paperno says the FICO score judges missed and late payments by many different criteria including how severely late the payment was, how recently it occurred, and the frequency of late or missed payments. The recentness of the incident is the most substantial to the FICO score. Mistakes of the far past have less impact than recent ones. Obviously, consumers with fewer mistakes will have better scores. Once mistakes are several years old, however, they might not affect your credit score at all.